PSU banks under stress

Mumbai, June 16: State-run banks may continue to face asset quality woes despite the fall in bad loans during the fourth quarter ended March 31, 2014, Fitch Ratings said in a report today.

According to the global credit rating agency, the economic conditions in the country continue to be weak with recovery being slow. Also, the amount of new loans turning non-performing is still around three times the loans recovered and upgraded at the largest nationalised banks.

“There is some evidence of higher recovery rates, but the write-downs and portfolio selloffs to asset reconstruction companies are likely to play a larger role in reducing reported non-performing loans (NPLs),” Fitch Ratings said.

Recently, some state-run banks, which have always lagged behind their private peers in asset quality, reported better-than-expected numbers. For instance, the State Bank of India was able to lower its gross NPA by 78 basis points and net NPAs by 67 basis points in the fourth quarter on the back of several measures.

Fitch said mid-tier PSU banks were in a particularly difficult position because of their high share of stressed assets and weak capital and earnings positions.

“State-owned banks’ exposure to sensitive and structurally weak sectors is high, and we do not expect any dramatic recovery in the near term, implying that we expect the asset quality challenges to remain in the foreseeable future,” it said.

Forecasting a difficult road ahead for some banks, Fitch said while a significant improvement on the asset quality front was not expected in the immediate future, incremental downside risk could be contained in the medium term. However, full recovery in profitability is expected to take some time.

“State banks’ capital position is under pressure and sensitive to downside pressures in asset quality, especially where capital buffers are already weak,” it noted.

While the capital adequacy ratio of nationalised banks is lower by around 370 points compared with large private banks, the rating agency fears this divide may widen if state-owned banks do not raise capital to offset the knock-on effects of deteriorating asset quality on earnings.